The Risks of Investing in Master Limited Partnerships in the Energy Industry

Higher volatility and lack of transparency could make these unsuitable vehicles for many investors

If your broker or financial advisor has recommended that you invest in Master Limited Partnerships (MLPs) in the energy industry, consider your options carefully and conduct proper due diligence. MLPs are a potentially risky investment and aren’t suitable for many investors.

What is a Master Limited Partnership (MLP)?

A Master Limited Partnership is a type of financial investment structure which combines the tradability of stock with the taxation structure of a partnership. Much like a stock, an MLP can be traded on a stock exchange. However, unlike a stock, it isn’t a unit of a corporation, so it is only taxed once as part of the owners’ incomes (unlike a corporation, which would be taxed twice – once at the level of corporate income, and once at the level of the shareholder).

Stocks vs. Master Limited Partnerships

Unlike a stock, in which you own part of the corporation, and (theoretically) have some power over how the company is managed, a partner in an MLP has no control over the MLP’s management. It is controlled by the general partners, all of whom may be separate corporate entities to avoid legal liability.

MLPs can be opaque

While the average stock investor has little real control over how a public company is managed, they can usually stay extremely well-informed about the financial status of any company in which they’re invested. As long as the company remains publically traded and other, larger investors hold significant shares, brokerage firms, financial news outlets, and the company itself will constantly publish information about profits, losses, products, marketing initiatives, and growth plans.

Unfortunately, there is often less public information available about MLPs, and much of the information available is provided by the MLP itself and brokerage firms that stand to profit from its sales. This means that there’s often very little independent information for an MLP investor to examine to determine whether it is still a good fit for their portfolio.

MLPs are subject to commodity prices

While many brokers tout the tax benefits of MLPs, the prices of these vehicles can be extremely unstable, fluctuating up and down based on the prices of commodities such as oil and natural gas. Many investors who are partners in MLPs aren’t happy with their returns, as the prices of many have drastically fallen with drops in energy prices.

Some MLPs are legitimate – but they’re almost universally risky

Many MLPs can be legitimate investments; however, it’s important to understand that buying an MLP is inherently risky. It’s much more like buying shares of a commodity or a private equity fund than investing in the stock of an energy corporation like Shell, ExxonMobil, Chevron, or BP. An issue that arises in the brokerage industry is when brokers have not made this distinction to their clients, and investors have bought MLPs thinking that they’re getting the safety of an oil company stock with the tax discount of a partnership. That simply isn’t the case.

Consider suitability of MLPs and any other investment in your portfolio

If your broker has recommended that you look into investing in Master Limited Partnerships as a way to diversify your portfolio into the energy industry, be careful. The additional risks of this type of financial investment structure can outweigh the tax rewards, and you could lose your money faster than you thought possible. And if you have already lost significant money after an unsuitable recommendation from your broker, you may be entitled to recover some or all of your losses from securities arbitration.

The Silver Law Group represents people who have been victimized by fraudulent or improper investment tactics, including unsuitability. We are a contingency-based firm, which means we will only collect a fee if you are able to recover money. For a no-obligation consultation with an experienced arbitration attorney, contact our firm at (800) 975-4345 or through our online form.